The Big Bang launching quota-free trade in clothing and textiles came in January and by February, the numbers showed ripples of the tidal wave to come. Clothing exports hit US$5.31bn, 25.6% up on January 2003, and textiles jumped 35.1%, to US$2.93bn. But then who could really tell what was happening? Both numbers trailed China's overall export surge in January, a year-on-year leap of 42.2%.
The removal of limits, mandated by the 1995 WTO agreement to tear down quota barriers, allows anyone to sell anywhere without restrictions – or almost anyone.
China alone is subject to "safeguard" measures to curb its export growth, supposedly to prevent "market disruption" in the importing country. The safeguards were conceived to prevent disruption, but they can also be deployed as weapons in the competition for international market share, as Turkey appears to be doing.
If producers in a WTO member state convince their governments that there has been market disruption, then Chinese growth in any of those markets can be capped at 7.5% a year for three years. The 7.5% is the proportion of the value of what China sold in that market in the previous year.
Americans workers are angry. The Economic Policy Institute blames China for the loss of nearly 1.5m jobs between 1989 and 2003. Its plea to a US congressional committee estimated that exports to China generated only 199,000 additional US jobs.
The Washington, DC-based National Council of Trade Organizations (NCTO) claims 2,600 American textile jobs were lost in December alone and says that China stands on the brink of destroying America's biggest single manufacturing employer. Citing a World Bank estimate, it warns that upwards of US$200bn in apparel trade will shift to China in the next few years, "most of it from very poor countries that depend on this trade to provide tens of millions of jobs."
The US Association of Importers of Textiles and Apparel got into a snarl over safeguards in December, but in a mid-January ruling, the US Court of International Trade slapped down the attempt to stem the Chinese tide. Appellants were told the government could not apply safeguards against China, as no new trade figures had been released on which to base a case for market disruption.
The textile lobby is pressing the US administration to use safeguards to restrict imports of knit shirts and pants. And, hardly surprising, the quota issue is rubbing up against the currency issue: US Senator Charles Schumer is backing calls for a 27.5% tariff on Chinese imports to offset the benefit Chinese exporters enjoy from their RMB exchange rate, which many Americans consider grossly undervalued. So anti-dumping actions are expected – and trade patterns could face disruptions in other areas: ironically, just when an opportunity comes along to put a dent in the US trade deficit, protectionists are demanding the US put new restrictions on tech exports to China.
Beijing, fearful of countervailing action, imposed an export tariff on its own exporters in mid-January to cool demand abroad. But one well-placed Western observer says the tariff is so low its only purpose is to show China is sensitive to overseas adjustment problems.
While the big shifts have yet to happen, industry associations on China's side of the divide are carping about barriers their members still face. The Textile Council of Hong Kong – whose members own much of South China's garment capacity and act as mainland re-exporters – are less concerned about outgoings on the new export tariffs than the delays from the extra paperwork the process involves, made worse by confusion among Chinese officials tasked with implementing the new system.
Frustration in Hong Kong
Council Secretary Michael Leung says members' biggest concern is how the tariff is to be levied, on what, and to what degree.
The export tariff is thought to be novel, but Japan imposed one in the 1980s to spare its car exporters the wrath of Detroit, which was fast stirring up trouble in Washington. The WTO frowns on such quasi-voluntary measures, but Jim Leonard, the United States deputy assistant secretary of commerce for textiles and apparel, welcomed Chinese efforts, however limited their effect.
The European Union has responded to events by simplifying procedures to initiate dumping complaints, and intensifying anti-counterfeiting efforts to protect its own labels in China and elsewhere in Asia. The EU also announced it had begun spending "structural funds" to reduce the impact.
No one doubts the huge impact the no-quota world will have over time. Overseas factories will disappear, when they find it impossible to beat economies of scale in China, where workers are paid less than a tenth of the wages their counterparts in the EU and US make. One report puts US sector wages at US$16 an hour, Mexico at US$4 and China at US$0.50.
For rich countries, the shift offshore only increases a process going on for decades. While NCTO may worry for the 650,000 industry jobs now under threat, the fact is the sector employed 2.25m 25 years ago. More aggressive automation has also reduced jobs.
Being a competitor in garments depends on good supply chains, logistics, transport infrastructure, and increasingly, automation – though cheap sewing-line labor and scale are critical. Hong Kong-headquartered Luen Thai Holdings, which supplies big US buyers like Liz Claiborne and Ralph Lauren, has plants in China and scattered in countries where it had to be to scoop up quota – but line workers in Sri Lanka and the Philippines earn more than their Chinese counterparts. By the time power charges in the Philippines are factored in, garments could end up costing 50% more than the same products made in China, according to one estimate.
In the capital-intensive textile segment, the US remains a player. Items such as high-end fabrics and industrial textiles, used to fit out everything from office blocks to cars and planes, require sophisticated automation and a solid grasp of new materials, factors that give richer countries the advantage.
Producers and governments in developed and less developed countries alike worry about losses of jobs and votes, and see China running off with half the world's textile and garment share. Half, in fact, is putting it lightly: One executive at Li & Fung, big logistics player in the sector, predicted last year that up to 80% of all clothing production could move to China with the quotas gone.
One Western industry watcher dismisses disruption fears, citing the de facto trade barriers against China in the safeguard provisions. "With safeguards in place until 2008," he said, "few will greatly increase Chinese capacity until the situation is clearer." Few importers want to be dependent on one source, he says, "though a 7.5% growth rate cap isn't bad."
Low-cost, but logistically challenged players in Africa and Asia, such as the Philippines and Bangladesh, stand to be overwhelmed by Chinese manufacturers.
Even Europe's big contender, Turkey, which has strong export channels into Europe and has been scaling up to take advantage of the quota-free world, could find it tough meeting ambitious export targets if it fails to use safeguards to full advantage over the next three years.
India, long bent on restricting company size to protect the little guy, has amended company law to enable its leading players to scale up. Emboldened by the lifting of quotas, Union Textile Minister Shri S. Vaghela said that India will increase its garment and textile volume from the US$13b of last year to US$30b in just two years. Indian politicians have a reputation for overstatement, but few doubt that India will be a major player.
The question is, how major compared to China? "India has a long way to go," says one Chinese industry source. "Its plants are smaller, its quality is lower and its infrastructure, communications and transport are not nearly as good."
Seeing such black days ahead for their major employment centers and big GDP earners, poorer countries joined last year's Istanbul Declaration, a vain plea to delay the Big Bang until after January 1. However much third-world producers complained about quotas, they at least assured them a share of developed markets.
Peter Shay, managing director of MMG Asia, a boutique investment bank targeting partnerships and M&A opportunities in the sector, prefers to stay focused on the big picture: "This is a really big thing," he says. "I have no idea how this is going to work out in the next few months, but the end of quotas is really important. Export tariffs and safeguards are just speed bumps along the way. They only run for three years – then it's global free trade."